The Business of Renting Your Vacation Home

Depending on the desirability of your vacation property, it could generate enough income to pay the mortgage for much of the year or cover property taxes if you rent it out during peak seasons. Does this sound like an opportunity?

You may want to obtain a copy of IRS Publication 527, which is all about rental income and expenses (including depreciation), and it explains how to report them on your tax return. It also covers casualty losses on rental property and renting out vacation property.

But don’t stop there; consult a tax professional for how renting your vacation house or condo will affect your personal tax situation.

The Forbes.com Real Estate Council has questions to consider before deciding to put your getaway place on the rental market. First, what is your goal? Are you trying to generate income (cash flow), or build equity (as an investment property)?

If not using your retreat year ‘round, it could make sense to turn it into a “hybrid”: a second home you can enjoy and a source of rental income.

Another important consideration is, what are the property/association rules if any? If your lake hideaway is part of a gated community, a condominium or homeowner’s association, pull out your documents. Many limit rentals to only a few weeks a year or may prohibit them entirely.

If leasing is permitted, you need to determine if there’s a market for the rental, and if what you could potentially earn. Realize that you’ll be giving up the option of personal use for a period, and will have extra costs, such as liability insurance, property management fees, and the inconvenience of having to leave it pristine when you vacate, which may mean hiring cleaners. Then there’s New Hampshire’s meals and rooms (rentals) tax. (If doing short-term rentals through Airbnb, they will extract this 9% fee for you.)

A good resource for market potential is a Realtor, and if you plan on having your property managed for you, this is the place to go. They can tell you what luxury rentals go for in the area, market the listing for you, and handle rental contracts (which includes vetting potential renters)—for a fee, of course.

Types of Rentals

Michael Joseph is CEO of InvitedHome.com, which specializes in luxury vacation rentals. “Make no mistake,” he said, “you’re taking on a business.” Managing a vacation property is “a lot more work than people anticipate,” he said, especially since guest expectations are “becoming higher.” Jon Gray of HomeAway.com, which owns VRBO (Vacation Rentals by Owner), said that “It starts with a commitment to customer service.”

Think you want to go it alone? People expect to be able to use credit cards. Who will screen tenants? Who will clean between guests if doing short-term rentals? Who will market your place? You’ll need great photos. Realtors also have lists of plumbers, electricians, appliance repair people in case of an emergency—such as when your long-term tenant takes a Caribbean vacation mid-winter, turns off the heat, and the pipes burst.

Long-term Tenants

Ready to be a landlord? You’ll need a contract, to check out potential tenants; credit records, and a set of house rules (smoking? sublet? pets?). Although you will get some money up front for a security deposit, if the renter doesn’t work out the eviction process is lengthy and can get nasty (which is why it’s worth getting a credit and background check). Plus, a lease will probably be a minimum of six months (maybe nine in university or college communities) during which you won’t have the use of your second home.

Short-term Rentals

Companies that help you rent your place for a weekend or week or month do the marketing, money collecting, and in some cases collect security deposits for you. But host versus landlord, the responsibilities are the same, with additional changeover chores in between guests. And, unlike typical landlord/tenant relationships, you as the host and your property will be reviewed, with those reviews prominently displayed on your online listing.

Since you set the price, you can ask more for prime summer or ski months, or holidays such as July 4th or Labor Day weekend. And with online home-sharing companies, there are plenty of opportunities to see what the market will bear plus a lot more flexibility in pricing.

But even with a company like VRBO or Airbnb, there’s a lot to keep abreast of. If you don’t do the cleaning/set up in between guests yourself, you’ll need to furnish extra sets of towels and sheets. You’ll need to pay attention to your phone app when you get inquiries and bookings and set up a calendar to block the dates.

The good news about short-term rentals is that if you find it doesn’t work for you, all you do is take your listing off the market and the place is all yours again.

Personal and Privacy Considerations

There are things you’ll want to keep in your second home when you’re not there so you don’t have to haul them all up each time you visit. Linens, extra clothes, personal photos, out-of-season accessories or outerwear, spices, canned goods, liquor, medicine, tools, touch-up paint, laundry detergent, etc. And if you don’t want renters using them, you’ll need to lock certain items away such as electronics, bikes, fishing or boating gear.

If you have a good-size walk-in closet (one under the stairs, for example), put a lock on it and fit what you can in there. (If you’re very personal about your space and favorite items, renting out your second home is probably not for you. There will eventually be accidental breakage or damage, beyond the extra wear and tear on the furnishings and appliances.)

Fulfilling Expectations

Then there are those expectations and demands consumers have when paying to rent a luxury home. You’ll need fast Wi-Fi, entertainment options including cable TV. Will you share your boat, pool or hot tub? Is there a great golf course nearby?

If you’re a spur-of-the-moment planner or frequent weekender, you probably won’t want to rent your valued retreat to strangers. But there are lots of business options and considerable revenue benefits for those who do—if they’re smart about it and plan accordingly.